All Forum Posts by: Carter M.

@Ned Carey

Hi Ned, 

The $26K doesn't originate from the debt, it comes out of the increased value of the property. It's basically a dividend paid out of equity. Re-financing is just the method used to unlock some of the appreciation in value.

You are right that we can only calculate IRR when an investment has been liquidated. But we can calculate ROI during any period (year) or cumulatively over the lifetime of an investment, and the geometric rate of return will equal the IRR at the end of the investment.

I'm impressed by the return Pawan has made on this investment. Not the kind of numbers I've been seeing here in Los Angeles, but if anyone can teach me where to look, I'd be grateful...

A cash out is certainly a return on investment and often the best (and biggest) part. You must consider any and all cash flows (positive and negative) when calculating ROI.

For example, consider a property that you acquire $50K for capital appreciation only. You don't rent it out, but sit on it for 5 years then sell it for $100K, making $50K. You would definitely consider this cash-out a return, yes? In this case your ROI would be 100 percent over the lifetime of the investment.

Cashing out part of your equity in an investment is no different. In your case, you consider both the rental income and the equity dividend (during your re-fi) as your return in that year. In other years, you'd just count the rental income. If you ever sell off the property, you just add your net gain (after repaying debt) to your running cash-flow tally to calculate total return. 

You had $34K in equity at purchase and the property value increased $39K from from $105K to $144K, making the new equity value $73K. You took out $26K from this, so your equity is now worth about $47K, a 38 percent increase.

In Year 1, your cash return is $7511 plus $26,060, so $33,571 on an initial investment of $43K, so an ROI of 78 percent. In Year 2 you make $5821 on the $43K, or 13.5 percent.

On a cash basis you put in $43K and get out about $33K, so around 92 percent over two years, or a compounded average yearly return of 38 percent per year. 

Since you cashed out some equity at the end of a year, another way to look at it is that your Year 1 ROI is about 78 percent and your Year 2 ROI is 13.5 percent. Cash on cash, your entire return for the two years will be nearly 92 percent, or over 38 percent annually. Not bad, especially considering after the cash-out you still increased the equity in the property 38 percent.